NZ central bank keeps rates steady, warns of slowing growth and trade tension

WELLINGTON: New Zealand’s central bank has kept interest rates steady and warned of rising risks to the outlook as growth slows and global trade frictions escalate, signalling its resolve to maintain record-low rates for some time.

The dovish tone of the Reserve Bank of New Zealand’s (RBNZ) statement, which nodded to a recent run of weak data, reaffirmed market expectations that no rate hike was on the near-term horizon and even led some analysts to project a slim but possible chance of a rate cut.

The central bank held the official cash rate at 1.75% for the 11th straight review as it works to boost inflation to 2%, the centre of its target band.

The statement from RBNZ governor Adrian Orr had a slightly more dovish tone than at the meeting in May, adding warnings over recent weakness in economic growth and the potential fallout from escalating trade tensions among major economies.

“The recent weaker gross domestic product (GDP) outturn implies marginally more spare capacity in the economy than we anticipated,” Orr said.

Trade tensions in some major economies also ”tempered slightly” prospects that robust global demand will underpin New Zealand’s economy, the central bank chief said in the RBNZ’s strongest warning to date of the harm such frictions could inflict on trade and business activity.

“What we’ve got in our judgment is slightly on the dovish side,” said Nick Tuffley, chief economist at ASB Bank.

“If we don’t see any material improvement in business confidence or we see a lot more impact coming through from global trade tensions, you can’t rule out a cut either.”

The RBNZ said policy will remain expansionary ”for a considerable period of time”, underscoring a dominant market view there will be no rate hike until mid-2019 at the earliest.

Analysts say the changes to the statement did not alter the thrust of the RBNZ’s policy intentions.

But the tweak in wording underscored Orr’s intent to break from the ambiguous messaging favoured by many of his counterparts, and respond more flexibly to developments in the economy to make the central bank’s communication easier to grasp for the public.

The New Zealand dollar barely reacted to the announcement, rebounding to around US$0.68 after a dip to US$0.6783.

It was last fetching US$0.6787.

Major central banks have struggled with soft inflation even as their economies strengthened on robust global trade, now under threat from trade frictions triggered by US President Donald Trump’s “America First” policies.

New Zealand is no exception with headline annual inflation having slowed to 1.1% in the first quarter, just off the bottom of the RBNZ’s target range of 1% to 3%.

Economic growth slowed to 0.5% in the first three months of this year, undershooting the RBNZ’s forecast. — Reuters